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Treatment of Noncitizen Employees Under the ACA’S “Play or Pay” Rules

Many employers employ non-U.S. citizens.  While some of these employees work on a year-round basis, others work only seasonally.  How does the Affordable Care Act (“ACA”) apply to these noncitizen employees?

For instance, should these employees be included in an employer’s workforce when determining whether the employer is subject to the ACA’s “play or pay” requirement?  And assuming an employer is subject to this requirement, how do these employees affect the penalties the employer might have to pay?

Overview of Play or Pay Rules

As thoroughly discussed in our January 2013 article, starting in 2014 a “large employer” (generally defined as an employer having 50 or more full-time employees during the prior calendar year) could face an annual penalty of $2,000 per full-time employee (in excess of 30) if it fails to offer its employees at least a minimal level of health coverage.  An employer may avoid this draconian penalty by offering health coverage to at least 95% of its full-time employees (including their children under age 26). 

However, a large employer may still face an annual penalty of $3,000 for any full-time employee who is eligible for a federal tax credit to purchase coverage through an electronic “Affordable Health Exchange” and who declines the employer’s offer of health coverage in favor of that Exchange-provided coverage. In order to avoid this penalty, an employer must ensure that the coverage it offers is both “affordable” by each full-time employee and sufficiently generous to meet a “minimum value” standard.

In general, an employer will be subject to these play or pay rules if it averaged 50 or more full-time employees on business days during the prior calendar year. Although “full-time” is defined as working 30 or more hours per week, even hours worked by employees who worked fewer than 30 hours per week must be counted − and then divided by 120 per month − to determine the number of “full-time equivalent” employees (“FTEs”). Those FTEs must then be added to the actual full-time employee count. Thus, an employer with 45 full-time employees and 10 part-time employees who averaged 15 hours per week would be treated as having 50 full-time employees – and therefore subject to the play or pay mandate.

Although the ACA does not define the term “employee” in the context of these play or pay rules, the employee definitions appearing elsewhere in the ACA draw no distinction between citizens and noncitizens.  The IRS therefore announced, in Notice 2011-36, that it will simply apply the common-law definition of “employee.” Accordingly, if noncitizens are considered common-law employees, they must generally be counted for purposes of the play or pay rules – unless an exception, safe-harbor, or transition rule applies.

The ACA’s Noncitizen Provisions

Under the ACA all lawfully present individuals will be able to purchase health insurance through an Exchange, whereas unauthorized aliens will be barred from doing so.  Moreover, lawfully present noncitizens who meet specified criteria will be eligible for a federal income tax credit to help purchase coverage through an Exchange.

For ACA purposes, a person is considered “lawfully present” in the United States only if he or she is – and is reasonably expected to be for the entire period of enrollment in an Exchange – either a U.S. citizen or national, or a noncitizen who is lawfully present in the United States. Until the Exchanges become operational, it is not clear what the shortest period of enrollment will be. Once that question is answered, certain noncitizens may be excluded from the “lawfully present” category (for instance, if the minimum period of enrollment is six months and they have only a three-month visa).

Seasonal Worker Exception

There is a statutory exception to the ACA’s “large employer” definition for certain employers that utilize “seasonal workers.”  Many noncitizen employees will qualify as seasonal workers.  Under this seasonal worker exception, an employer whose average workforce during the prior calendar year exceeded the 50-employee threshold – but who actually exceeded that threshold on 120 or fewer days during that year – need not comply with the play or pay rules if seasonal workers were the only reason the threshold was exceeded during that shorter period.

Rather than looking at 120 days, an employer may choose to apply this seasonal worker exception on the basis of 4 calendar months.  In either event, there is no requirement that the days or months be consecutive.

Look-Back/Stability Period Safe Harbor

To the extent that noncitizen employees work only seasonally, a large employer may be able to treat them as working less than full-time during even their busy season. This is because the IRS has developed a fairly detailed set of “safe-harbor” rules by which an employer may determine which “variable-hour” or “seasonal” employees should be considered full-time under the 30-hour standard. (For now, any good-faith definition of a “seasonal employee” is acceptable.)

Under this “look-back/stability period safe harbor,” an employer may track an employee’s hours during a “measurement period” of 3 to 12 months. If the employee averages at least 30 hours per week during that period, he or she would be considered full-time during a subsequent “stability period” of at least six months (but generally no shorter than the measurement period). If the employee averages fewer than 30 hours per week during the measurement period, he or she need not be considered full-time during the subsequent stability period – even if the employee actually works more than 30 hours per week during that stability period.

Accordingly, if an employer (1) reasonably classifies its noncitizen employees as “seasonal employees,” (2) tracks their hours over a standard measurement period of 3 to 12 months, and (3) finds that they average fewer than 30 hours per week during that period, the employer may classify these employees as other than full-time during a subsequent stability period. And regardless of whether they must be treated as full-time during that stability period, the employer could safely exclude these employees from the employer’s health plan – with no risk of incurring penalties – during the initial measurement period.

Six-Month Transition Rules

There are also two different transition rules that might be of particular interest to employers utilizing noncitizen employees on a temporary or seasonal basis. Both of these provisions allow for determinations that would otherwise be made over the entirety of 2013 to instead be made on the basis of only a six-month portion of the year.

The first of these transition rules might allow an employer to defer the play or pay requirement by one year. Under this provision, an employer may determine whether it meets the 50-employee threshold to be considered a “large employer” during 2014 by reference to any consecutive, six-month period during 2013. Thus, if noncitizen employees work for more than 120 days, but are still employed only “seasonally,” an employer might be able to select a consecutive, six-month period when its average number of full-time employees (plus FTEs) is under 50. This would allow the employer to defer compliance with the play or pay requirement until 2015.

The other six-month transition rule applies to the look-back/stability period safe harbor. It would allow an employer to rely on a twelve-month stability period during 2014 while using a 2013 measurement period of as few as six months. Depending on which six-month period is selected (and the regulations do impose certain constraints on this selection), this transition rule might allow an employer to avoid characterizing seasonal employees as full-time during 2014.

Under current guidance, both of these transition rules will apply only during 2013, with respect to coverage that might be required during 2014. There is no such limitation, however, on the use of the seasonal worker exception described above. Accordingly, any employer utilizing the services of employees – whether U.S. citizens or lawfully present noncitizens – on a seasonal or temporary basis will want to take heed of these rules.